You are evaluating a company that has Net Income of $100M and a PE multiple of 15x. The company is considering raising $200M in debt in order to pay a one-time special cash dividend to shareholders. Is it a good idea?
Seems like I am missing something here. Please provide guidance :) Thx!
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Depends on what feasibility means in this case, really. Can’t really derive anything out of the PE given you have absolutely no info (like discount rate, plowback ratio, etc) — only equity value can be derived, and even then, unless given a P/B and the amount of debt the company has, there’s no way to determine the impact. What I’d do is simply get the EBT (100/.8)~125. Would you expect to pay 125 of interest out of 200 of additional debt? Probably not, so then it is feasible/realistic to do it. That’s as much analysis as you can do given the info you have.
Could be argued either way with more information. However, Equity Value would be 1,500 (100*15). If the company is in stable condition, this additional debt would actually increase the firm's value (by reducing WACC).
So, the new capital structure would be: Equity - 1500, Debt - 200. After the dividend, Equity would be 1300, Debt - 200. From the given information, one cannot argue that it's bad. Only reason from the given information of why it would be a bad idea is usually, very early-stage companies start off with Equity only. So, if the mentioned company is a start-up, money would be better spent by reinvesting in the company instead of paying dividends.
With data provided, you can only focus on ECM implications. I’m not an ECM guy, but it’s feasible. You are buying back 13.3% of your marlet cap (200/1500). That’s big but not unheard off.
Can’t really do much analysis on the Debt side (can I raise such debt? Need to know existing capital structure) or on valuation side.
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